Five stocks to watch in emerging healthcare

A consolidation of companies specialising in particular areas of healthcare has led to more a efficient use of infrastructure and increased buying power, according to analysts.
Photo: James Davies

by
Marianna Papadakis

The healthcare sector is becoming increasingly attractive for those seeking growth and yields in defensive stocks. Healthcare companies are likely to ­benefit from exposure to a strengthening US economy as well as an ageing population, as uncertainty about China leaves resources small caps looking less attractive to investors, analysts say.

RBS Morgans’ healthcare analyst Scott Power said emerging companies in the healthcare and science sector were attracting more attention because of share price appreciation in the past few months. Stocks including
Capitol Health
,
1300 Smiles
,
Greencross
, and
iSonea
have all made gains.

There has been a consolidation of companies that specialise in particular areas of healthcare and this has led to more efficient use of resources and increased buying power. The biggest risk continues to be changes in government regulation and the difficulties of getting new products approved.

“With money coming out of the ­mining sector, this will attract more attention," Power says. “Investors are looking more for later-stage companies, ones with products close to ­coming onto the market and generating revenue."

Wilson HTM Investment Group healthcare analyst
Shane Storey
says companies that are attracting attention in the biotech and medical device sector are the ones with current earnings and global rights to developed products. This includes stocks such as
Sirtex
,
Acrux
and
Mayne Pharma Group
. However, he adds, there remains risk aversion to companies that are years away from earnings.

“There are not many that have made it through to earnings.It is a race to profitability," Storey says. “There are companies like
Universal Biosensors
and
Nanosonics
starting to get a revenue profile and their costs right – they will come into earnings in the next year or two and find no ­shortage of investor interest."

Here is a selection of health stocks receiving attention from the market:

Related Quotes

Company Profile

NovaPort Capital’s Currie says Sirtex, which makes liver cancer treatments, is generating profit and expanding ­market size globally, including in the US and Europe. “It is a company that is expanding market size as opposed to trying to prove its product works or steal market share," he says.Sales of its liver cancer treatment drug rose 6.1 per cent in the third ­quarter of fiscal 2013, down from 34 per cent growth in the previous corresponding period.

Morningstar rated SRX a “hold" ­saying the result was ­“disappointing" given the consistent, strong quarterly sales growth in the past two years averaging around 24 per cent.

“These would likely boost uptake among more conservative doctors and elevate the treatment from salvage/last resort status to more mainstream usage," Morningstar has said.

CIMB
maintains a “neutral" rating saying a divestment by its US-listed competitor Nordion Targeted Therapies business to London-based, international healthcare company BTG for $US200 million ($215 million), implied that Sirtex Medical was trading at a ­premium.

Acrux
’s key product is Axiron, a spray applied to the skin to treat men with low levels of testosterone. RBS Morgans rates Acrux “outperform". Power says it is a profitable, dividend-paying company. Acrux’s licensing partner, Eli Lilly, reported the strongest sales quarter since the product was launched last year, with ACR receiving $US25 million in fiscal 2014. Power says this was above market expectations and increased confidence in forecasts. “We expect
Eli Lilly
to show sales in excess of $US37 million in the next quarter."

However, Macquarie Private Wealth is more cautious, rating the stock a “neutral". Macquarie analysts say a reduction in rebate in the US suggested Eli Lilly was getting pricing traction with insurers, and it was unlikely to move lower than what more established competitors offered. There was also a risk of market growth slowing.

Demand for
Nanosonic
’s product, ­Trophon, an ultrasound probe disin­fection system, is gaining traction and had resulted in share price gains in the past couple of months, Wilson HTM’s Storey says.“They have very good margins and a good business model. They will have a good fourth quarter if that momentum continues and it could surprise people how quickly they become profitable."

After reporting sales growth of 270 per cent in the first half of 2012, NAN recorded $4.4 million in sales for the first half of 2013, a decline of 13 per cent, but Storey expects NAN to benefit from expansion in the US and Europe.

Cannaccord Genuity analysts rate the stock a “buy", noting the company signed a non-exclusive agreement for Toshiba to market and distribute ­Trophon in the UK. They are confident Trophon has very good commercial potential that “will be realised".

Virtus
, which provides IVF, gynaecology and obstetrical services, has profit growth and a solid business model, ­Currie says. “The barriers to entry make it attractive to investors," he says. “If services become more expensive, that could put a lid on growth. But it has all the hallmarks of an attractive business operating a service that people want."

Power says the company has consolidated and attracted high calibre specialists with options and shares.

“Better healthcare operators can show sustainable and consistent profit or earnings-per-share growth and translate that into higher share prices," Power says. “They are a good example of benefiting from all three things: infrastructure efficiency, purchasing power and good-quality staff."

Power says the Brisbane company is expected to have positive results from trials of its metastatic colorectal cancer drug due out in the first half of 2014. RBS Morgans maintains an “outperform" rating on Alchemia, despite profits being weaker than expected in the March quarter.

“It is generating revenue from its generics business that gives it some stability," Power says. “But the biggest upside will come from a positive read out on its cancer product next year. We don’t think a lot of that has been factored into the current share price."